Danske Research Team
Danske Bank A/S
When the IMF published its latest WEO forecast, it also marked the ninth consecutive time that it revised down its EM and developing economies growth forecasts. The continuous downward revisions raise the question of whether the slowdown is only cyclical or whether EMs are experiencing a structural slowdown after a long boom period in the 2000s. According to the IMF’s latest projections, EM and developing countries are now expected to grow by 4% this year – 0.2% lower than expected. This is certainly a world of change compared with the average growth rate in excess of 6% experienced in the boom years of the 2000s.
What is the explanation for the latest downward revision? While overestimation of Chinese growth drove previous years’ downward revisions, this time around the revisions are caused by sharply lower growth projections for Brazil and more modest adjustments to other commodity-exporting countries in Africa and the former Soviet Union (excluding Russia). In contrast, and to the surprise of many, the IMF held on to its China forecast despite recent events.
Will the downgrades stop here? It is still too early to say. Undoubtedly, many EMs will face further headwind in the short to the medium term; several commodity-producing countries will have to embark on sizeable fiscal adjustment to reduce imbalances, which will weigh on growth. Furthermore, although concerns about a collapse in China have abated, the structural shift in the Chinese economy towards services will continue to curtail commodity import demand. Finally, EMs cannot rely on advanced economies, where the recent data round clearly also signals economic weaknesses.
How should we look at the EM markets? The days of looking at EMs as an aggregate group are certainly over. Investors need to be much more selective in picking; we are certainly seeing pockets of strength in the EM space, such as Mexico, India, the EMEA region and other commodity-importing countries with relatively strong external positions.
How will EM FX perform? We think the weak growth prospects will weigh on sentiment towards many EMs. As discussed in our Strategy note, 16 October, the brief rally in many EM currencies has ended and we are now again seeing a weakening trend in many EM currencies.
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